08/05/96 TABLE: Four Ways Shorts Get Stung

Four Ways Shorts Get Stung

There are four distinct types of short squeezes. All force short-sellers to buy back stock, thereby driving up share prices. THE TRADE A short-seller sells shares that are borrowed, either from an institutional investor or--more perilously--from a retail brokerage. Shares in any margin account can be borrowed if they haven't been fully paid for. The short hopes to eventually replace the borrowed stock at a lower price, pocketing the difference. THE MARKET-FORCES SQUEEZE In the most typical short squeeze, market forces or favorable news drive up share prices. If prices move up sharply, shorts must immediately put up more collateral--or return the shares. THE INSTITUTIONAL SQUEEZE Institutional shareholders --mutual funds and pension funds--who loan out shares to short-sellers can demand their return at any time. When that happens, the shorts must hand them over. THE ACCOUNT SWITCH If shareholders move shares from margin to cash accounts, shorts must return any shares borrowed from the margin account. THE HYPE SQUEEZE Common among thinly traded shares. The company, or stock promoters, intentionally pressure shorts by praising the stock to small investors or issuing overoptimistic press releases to drive up the share price. THE BUY-IN When shorts must return borrowed stock, the shares must be bought on the open market. Thus, short-sellers can sustain huge losses if prices have risen--and since their purchases drive up prices still further, they boost the pain of fellow short-sellers. DATA: BUSINESS WEEK